French Election Shock: Pound to Euro Rate Hits 10-Day Best as One Fear Replaced by Another

July 8, 2024 - Written by John Cameron

STORY LINK French Election Shock: Pound to Euro Rate Hits 10-Day Best as One Fear Replaced by Another

The Pound to Euro (GBP/EUR) exchange rate hit 10-day highs at 1.1850 in an immediate response to the French election before settling around 1.1825.

Ahead of the second round of the French Parliamentary elections, markets expected the National Rally (RN) would win most seats with the other parties scrambling to prevent an overall majority.

In the event, tactical voting demanded by the left and centrist parties was notably more effective than expected with the RN pushed into third place.

This alleviated markets unease over an RN majority, but was offset by concerns over parliamentary deadlock and potential risks to economic reform plans.

The left-wing New Popular Front alliance (NFP) won 182 seats - well short of the 289 seats needed for an absolute majority. President Emmanuel Macron's centrist Ensemble alliance secured 163 seats, and the RN 143 seats.

There will be major difficulties securing any majority in the assembly while the NFP will make strong calls for economic reforms to be reversed.

According to ING; “The positive market reaction after the first round, which had seen an RN victory, gave an indication that investors were more comfortable with the far right than with the far left, which is perceived as a greater danger to the already fragile French fiscal position.”

It added; “From an FX perspective, there are lingering risks for the euro moving on, and we continue to see the common currency as a likely laggard in the G10 space.”

MUFG commented; “NPF is hardly a solid union and could fragment under the pressure of agreeing a policy mandate with Ensemble. There is a reasonably high chance that we quickly get to a point where gridlock is what emerges with little prospect of much meaningful policy being enacted. President Macron cannot call another election for a year and a prolonged period of gridlock will raise fears over the fiscal outlook again.”

According to Chris Weston, head of research at Pepperstone "Markets won't like a far-left government having a say."

He did, however, add; “At the same time, the fact that centrist Macron has polled better-than-expected, as well as the number of seats the Left have obtained, means passing the NFPs manifesto in full will be a real challenge. And while uncertainty is high once again, this should contain the fallout."

In the UK, attention will turn to monetary policy with comments from the Bank of England watched closely.

Outgoing MPC member Haskel is due to speak on Monday and his comments will be important in assessing whether hawkish members are now more confident over the inflation outlook.

The latest British Chambers of Commerce (BCC) survey recorded that 39% of companies were planning price hikes over the next three months compared with 46% in the previous survey in April.

Companies were more confident over sales, but investment intentions remained notably weak.

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TAGS: Pound Euro Forecasts